48 F.

3d 623
31 Fed.R.Serv.3d 1422

HBE LEASING CORPORATION, Signal Capital Corporation,

John
Hancock Corporation, Petitioners-Appellees-Cross-Appellants,
v.
Clemence FRANK, Respondent-Appellant,
and
Gerald Lefcourt, Jay Goldberg, Michael Berger, Judd
Burstein, Goldstein & Stoloff, Richard Ware Levitt
and Cliff Gordon, Respondents-Cross-Appellees.
Nos. 184, 564, Dockets 93-9263L, 94-7185XAP.

United States Court of Appeals,

Second Circuit.
Argued Oct. 13, 1994.
Decided Jan. 18, 1995.
As Amended on Denial of Rehearing March 13, 1995.

Edward Rubin, New York City, for respondent-appellant.

S. Pitkin Marshall, New York City, for petitioners-appellees-crossappellants.
Sheryl E. Reich, New York City (Gerald B. Lefcourt, Lefcourt & Dratel,
on the brief), for respondents-cross-appellees Gerald Lefcourt, Jay
Goldberg, Judd Burstein, Richard Ware Levitt, and Cliff Gordon.
Michael G. Berger, pro se.
Before: NEWMAN, Chief Judge, WALKER and CALABRESI, Circuit
Judges.
JON O. NEWMAN, Chief Judge:

This appeal concerns the application of fraudulent conveyance law to multi-

party transactions involving an insolvent judgment debtor. In one set of

transactions, the debtor exchanged mortgages for funds and immediately
transferred the funds to a third party. In another set of transactions, the debtor
paid the attorney's fees of its co-defendants in a civil action. The primary
question in both circumstances is whether the debtor received fair consideration
for its property.
Clemence Frank ("Clemence") appeals from an order of the District Court for
the Southern District of New York (Gerard L. Goettel, Judge) voiding two
mortgages that she held in real property owned by judgment debtor H.H. Frank
Enterprises, Inc. ("Enterprises"). The appellees, judgment creditors of
Enterprises who were petitioners in the District Court ("Petitioners"), crossappeal from the District Court's order insofar as it dismissed their claims
against a group of attorneys who allegedly received fraudulent conveyances
from Enterprises ("the Attorneys"). We affirm the avoidance of one of
Clemence's mortgages on the ground that she knew or should have known that
it was part of a single transaction from which Enterprises received no benefit.
However, we reverse the avoidance of her other mortgage and remand for
further proceedings, because Enterprises may have used the proceeds from that
mortgage for legitimate corporate purposes. On the cross-appeal, we reverse
and remand the dismissal of Petitioners' claims against the Attorneys, because
although the District Court properly found that Enterprises received fair
consideration for these payments, it failed to consider Petitioners' alternative
theory that the payments were made with actual fraudulent intent.

Background
3

Petitioners in this proceeding to set aside fraudulent conveyances represent a

group of leasing companies and their assigns who were prevailing plaintiffs in a
civil RICO fraud action tried before Judge Goettel and a jury. The defendants in
the RICO action were: eight individuals, including Hiram H. Frank and Hiram
J. Frank, who are the husband and son, respectively, of appellant Clemence
Frank; three corporations, including Enterprises, in which Hiram J. Frank owns
a majority interest; and H.H. Frank Enterprises, Inc. Pension Plan ("the Pension
Plan"). After a jury trial, the District Court entered judgment for the plaintiffs
for trebled RICO damages of $19,670,142 plus interest, for which the
defendants are jointly and severally liable; for common law fraud damages
against various defendants totaling $6,556,714; and for punitive damages
totaling $5,000,000. That judgment was affirmed on a prior appeal. HBE
Leasing Corp. v. Frank, 22 F.3d 41 (2d Cir.1994).

With the judgment largely unsatisfied, Petitioners commenced this

supplementary proceeding in aid of judgment, pursuant to Fed.R.Civ.P. 69(a)

and N.Y.C.P.L.R. Sec. 5225(b) (McKinney 1978), to void certain transfers from
Enterprises to Clemence and to the Attorneys as fraudulent conveyances under
New York law. Neither Clemence nor the Attorneys were defendants in the
underlying RICO action.1
5

The contested transfers to Clemence consist of two mortgages on real property

owned by Enterprises. These mortgages secured notes for $250,000 and
$100,000, respectively, which Clemence received from Enterprises when she
advanced those same amounts to the corporation. At the time of these mortgage
transactions in 1992, Enterprises was a defendant in the RICO action, but no
judgment had yet been entered. Clemence was not at that time an officer,
director, or shareholder of Enterprises, although she had been a director until at
least mid-1990. Petitioners do not deny that Clemence advanced a total of
$350,000 at the time the mortgages were created, nor do they dispute in this
action that the money she advanced derived from her own separate funds.
Rather, their claim that the mortgages represented fraudulent conveyances
stems from the fact that shortly after Enterprises received the $250,000 loan
from Clemence, Enterprises disbursed these funds to her son, Hiram J. Frank,
purportedly as repayment for loans he had earlier made to Enterprises.
Similarly, shortly after Enterprises received the $100,000 loan from Clemence,
the corporation disbursed approximately $60,000 of these monies to the
Attorneys.

The total of the contested conveyances to the Attorneys comprised Enterprises'

payment of $775,722 in fees for legal services allegedly rendered not to
Enterprises itself, but to its co-defendants for what Enterprises contends was
part of a unified legal defense in the RICO action. This sum does not include an
additional $344,000 in fees that Enterprises paid to its own attorneys or
$741,000 that the Pension Plan paid to various attorneys.

In an opinion, the District Court accepted three separate grounds for voiding
Clemence Frank's mortgages. HBE Leasing Corp. v. Frank, 837 F.Supp. 57
(S.D.N.Y.1993). First, relying on the "Deep Rock" doctrine of equitable
subordination, see Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 59
S.Ct. 543, 83 L.Ed. 669 (1939) ("Deep Rock "), it found that Clemence was an
"insider" whose loans represented capital contributions to Enterprises,
regardless of whether the proceeds were used for legitimate corporate purposes,
and that the mortgages should therefore be equitably subordinated to the claims
of Petitioners. HBE Leasing, 837 F.Supp. at 60-61. Second, the Court found
that Clemence had received the mortgages as part of a single transaction in
which the mortgage proceeds were improperly transferred to her son, Hiram J.

Frank. Because Enterprises itself received no benefit from the completed

transaction, the District Court found the transfer of the mortgages to Clemence
to be fraudulent, regardless of whether she knew of the entire transaction. Id. at
61. Third, the Court found that Clemence had not taken the mortgages in good
faith. Id. at 62.
8

The District Court also found that Enterprises' payments to the Attorneys were
not fraudulent transfers, because Enterprises realized a benefit from the
Attorneys' representation of its co-defendants as part of a joint defense in the
RICO action. Id. at 63. The Court also reasoned that it would place too great a
burden on trial lawyers if they had to inquire into the financial resources of
their clients before they accepted payment of legal fees. Id. at 63-64.

Finally, in an unpublished order the District Court determined that further

discovery and a hearing would be necessary to resolve a separate claim against
Clemence relating to a transfer from her husband, Hiram H. Frank.
Accordingly, the District Court severed this claim for further proceedings.

Discussion
A. Appellate Jurisdiction
10

We must initially consider the question of our appellate jurisdiction, which

arises because this supplementary proceeding involves multiple claims, not all
of which have been adjudicated.2 On November 2, 1993, the District Court
entered its order and opinion adjudicating Petitioners' claims pertaining to
Clemence's mortgages and Enterprises' payments to the Attorneys.
Subsequently, on December 17, 1993, the District Judge denied a motion by
Clemence to stay the November 2 order as it related to her mortgages. The
Judge reasoned that a stay would needlessly delay the sale of valuable
properties, and that if Clemence succeeded in having the order overturned on
appeal, any deficiency in the sale proceeds could be satisfied by the Petitioners,
who were all solvent. Finally, on January 13, 1994, the District Court entered a
document called a "judgment" (signed on December 15, 1993), which purported
to dispose of the two previously decided claims, and which severed for further
proceedings a third claim relating to a transfer to Clemence from her husband,
Hiram H. Frank. Neither this "judgment" nor any order contained an express
determination that there was no just reason for delay. The judgment, however,
ordered Clemence "to execute and file all documents necessary and appropriate
to vacate and remove any mortgage lien she may have asserted against the
property of HH Frank Enterprises, Inc. as to the aforesaid mortgages."

11

The parties contend that we have jurisdiction over this appeal pursuant to 28
U.S.C. Sec. 1291 (1988), which grants us jurisdiction when the District Court
has entered a final judgment. Rule 54(b) of the Federal Rules of Civil Procedure
sets out the requirements for the entry of a partial final judgment in multi-claim
or multi-party actions. A final judgment may be entered as to some--but fewer
than all--claims or parties "only upon an express determination that there is no
just reason for delay and upon an express direction for the entry of judgment."
Fed.R.Civ.P. 54(b). The Rule makes clear that if the District Court does not
both direct entry of judgment and expressly determine that there is no just
reason for delay, then its order or decision is not final, whether or not it is
labeled a "judgment."3

12

Once separate claims or claims against separate parties have been fully
adjudicated, Rule 54(b) commits the decision to enter a judgment to the
discretion of the District Court. See Curtiss-Wright Corp. v. General Electric
Co., 446 U.S. 1, 8, 100 S.Ct. 1460, 1464-65, 64 L.Ed.2d 1 (1980); Ginett v.
Computer Task Group, Inc., 962 F.2d 1085, 1092 (2d Cir.1992). But the
exercise of this discretion must follow the procedures set out by the Rule, and
the requirement of an express determination that there is no just reason for
delay has not been taken lightly by this Circuit. We have found an abuse of
discretion where entry of judgment has been accompanied by a mere repetition
of the statutory language that "there is no just reason for delay," without any
reasoned explanation for such determination. See, e.g., Harriscom Svenska AB
v. Harris Corp., 947 F.2d 627, 629-30 (2d Cir.1991); Cullen v. Margiotta, 618
F.2d 226, 228 (2d Cir.1980). A fortiori, the entry of a "judgment"
unaccompanied even by the statutory formula is not a sufficient basis for our
jurisdiction. In re Chateaugay Corp., 928 F.2d 63, 64 (2d Cir.1991).

13

In the instant case, the District Court did not expressly determine that there was
no just reason for delay in entering judgment. Contrary to the contention of the
parties, the explanation given by the District Court for denying Clemence's
motion for a stay does not supply the missing express determination, because
there is simply no evidence that the District Court intended its ruling on the
stay to constitute a Rule 54(b) certification. The requirement of an express
determination cannot be met if the District Court does not make clear that such
determination is for the purpose of certifying a final judgment (e.g., by labeling
its order a "Rule 54(b) Certification"). Because there was no Rule 54(b)
certification, the District Court's order remains interlocutory.4

14

However, an immediate appeal may be taken from an interlocutory order

granting an injunction. See 28 U.S.C. Sec. 1292(a)(1) (1988). An order has the

practical effect of granting injunctive relief within the meaning of section

1292(a)(1) if it is " 'directed to a party, enforceable by contempt, and designed
to accord or protect some or all of the substantive relief sought by a complaint,'
" Abish v. Northwestern National Insurance Co., 924 F.2d 448, 453 (2d
Cir.1991) (quoting Korea Shipping Corp. v. New York Shipping Ass'n, 811
F.2d 124, 126 (2d Cir.1987)), and if the appealing party demonstrates " '
"serious, perhaps irreparable, consequences," ' " id. (quoting Korea Shipping,
811 F.2d at 126 (quoting Carson v. American Brands, Inc., 450 U.S. 79, 84, 101
S.Ct. 993, 996, 67 L.Ed.2d 59 (1981))).5
15

The District Court's order granted injunctive relief against Clemence insofar as
it directed her to remove any liens she may have asserted on the property that is
subject to her mortgages. Unlike the provisional remedies of attachment and
replevin, which do not constitute injunctions for the purpose of section 1292(a)
(1), see 16 Charles A. Wright et al., Federal Practice and Procedure Sec. 3922,
at 43 (1977), the District Court's order is directed to a party, and it is
presumably enforceable, if necessary, by contempt. The order is also plainly
designed to accord the substantive relief sought by Petitioners. Finally, it
threatens Clemence with irreparable harm, because it contemplates the
immediate delivery and sale of the mortgaged property but does not require a
bond or other security from Petitioners. In these respects, the order is far more
than a simple adjudication of liability or a declaration of property rights, and it
is accordingly subject to interlocutory appeal under section 1292(a)(1).6

16

Although the District Court's injunctive order is interlocutory, in the sense that
another claim remains to be adjudicated, the District Court has fully
adjudicated Petitioners' claim for injunctive relief, and the merits relating to
Clemence's mortgages are therefore before us in precisely the same manner as
they would be on appeal from a final judgment. See 16 Wright, supra, Sec.
3921, at 21-22. We also find that this is an appropriate case in which to exercise
our discretion to assert pendent appellate jurisdiction over Petitioners' crossappeal, see, e.g., Golino v. City of New Haven, 950 F.2d 864, 868-69 (2d
Cir.1991), cert. denied, --- U.S. ----, 112 S.Ct. 3032, 120 L.Ed.2d 902 (1992);
San Filippo v. United States Trust Co. of New York, 737 F.2d 246, 255 (2d
Cir.1984), cert. denied, 470 U.S. 1035, 105 S.Ct. 1408, 84 L.Ed.2d 797 (1985),
because determining whether Clemence's second mortgage represents a
fraudulent conveyance depends in part on the merits of Petitioners' claim
against the Attorneys.

B. Standard of Review
17

In a special proceeding under New York C.P.L.R. Sec. 5225(b),7 applicable in

the District Court via Fed.R.Civ.P. 69(a), a court may grant summary relief
where there are no questions of fact, but "it must conduct a trial on disputed
issues of fact on adverse claims in a turnover matter," General Motors
Acceptance Corp. v. Norstar Bank of Hudson Valley, 156 A.D.2d 876, 549
N.Y.S.2d 862, 863 (1989); see also Port of New York Authority v. 62 Cortlandt
Street Realty Co., 18 N.Y.2d 250, 273 N.Y.S.2d 337, 340, 219 N.E.2d 797, 799
(1966) (summary judgment standard applies to special proceedings), cert.
denied, 385 U.S. 1006, 87 S.Ct. 712, 17 L.Ed.2d 544 (1987). The District Court
implicitly treated the parties' submissions as motions for summary judgment:
finding that no material facts were in dispute, it entered judgment without a trial
on the basis of the affidavits and appended exhibits. We therefore review its
decision de novo.
C. Substantive Fraudulent Conveyance Law
18

Petitioners contend that the transfers to Clemence Frank and the Attorneys were
fraudulent under the New York Uniform Fraudulent Conveyance Act
("UFCA"), N.Y.Debt. & Cred.Law ("DCL") Secs. 270-281 (McKinney 1990).
The UFCA identifies several situations involving "constructive fraud," in which
a transfer made without fair consideration constitutes a fraudulent conveyance,
regardless of the intent of the transferor. One situation involving constructive
fraud is identified by DCL Sec. 273-a:

19
Every
conveyance made without fair consideration when the person making it is a
defendant in an action for money damages or a judgment in such an action has been
docketed against him, is fraudulent as to the plaintiff in that action without regard to
the actual intent of the defendant if, after final judgment for the plaintiff, the
defendant fails to satisfy the judgment.
20

In this case, Enterprises made the contested transfers after it became a

defendant in Petitioners' RICO action, and Enterprises has now failed to satisfy
the final judgment in that action. Thus, the transfers are fraudulent under
section 273-a unless they were made for "fair consideration," which is defined
by DCL Sec. 272:

Fair consideration is given for property, or obligation,

21
22When in exchange for such property, or obligation, as a fair equivalent therefor,
a.
and in good faith, property is conveyed or an antecedent debt is satisfied, or
23When such property, or obligation is received in good faith to secure a present
b.
advance or antecedent debt in amount not disproportionately small as compared with
the value of the property, or obligation obtained.

24

Even where fair consideration is given in exchange for the debtor's property, a
transfer may be fraudulent under the UFCA if it is marked by "actual fraud,"
that is, if it is made "with actual intent, as distinguished from intent presumed in
law, to hinder, delay, or defraud either present or future creditors," DCL Sec.
276.

1. Clemence Frank's Mortgages

25

Clemence received her mortgages from Enterprises as security for

contemporaneous advances to the corporation of $350,000 of her own funds.
On the surface, then, Clemence appears to have given fair consideration for the
mortgages, because they secured present advances of the same value. See DCL
Sec. 272(b). Nevertheless, the District Court ruled on three somewhat related
grounds that the mortgages should be voided under the constructive fraud
provisions of DCL Sec. 273-a. We consider each of these grounds in turn, and
then apply the resulting legal principles to the mortgage transactions.

26

a. Equitable subordination. Of the three grounds, it will be convenient to

consider first the District Court's view that the mortgages could be voided
under the doctrine of equitable subordination, without regard to the ultimate
fate of the funds Clemence advanced. This conclusion was based on a finding
that Clemence was an "insider" of Enterprises whose cash advances were
deemed to be capital contributions rather than loans. The doctrine of equitable
subordination, however, simply does not apply to state-law fraudulent
conveyance claims. Equitable subordination is distinctly a power of federal
bankruptcy courts, as courts of equity, to subordinate the claims of one creditor
to those of others. See generally Scott M. Browning, Note, No Fault Equitable
Subordination, 34 Wm. & Mary L.Rev. 487 (1993); Helen D. Chaitman, The
Equitable Subordination of Bank Claims, 39 Bus.Law. 1561 (1984). This broad
equitable power to disallow and reorder claims, first announced in bankruptcy
case law, see Deep Rock, supra; Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238,
84 L.Ed. 281 (1939), and now codified in the Bankruptcy Code at 11 U.S.C.
Sec. 510(c) (1988), derives from the Bankruptcy Court's role as administrator
of the debtor's estate for the equal benefit of all creditors, see, e.g., Pepper, 308
U.S. at 303-05, 60 S.Ct. at 243-45.

27

Unlike the Bankruptcy Code, the UFCA is a set of legal rather than equitable
doctrines, whose purpose is not to provide equal distribution of a debtor's estate
among creditors, but to aid specific creditors who have been defrauded by the
transfer of a debtor's property. See Boston Trading Group, Inc. v. Burnazos,
835 F.2d 1504, 1508 (1st Cir.1987).8 Thus, the UFCA does not bestow a broad
power to reorder creditor claims or to invalidate transfers that were made for

fair consideration, at least where no actual intent to hinder, delay, or defraud

creditors has been shown. As the definition of "fair consideration" in DCL Sec.
272 makes clear, even the preferential repayment of pre-existing debts to some
creditors does not constitute a fraudulent conveyance, whether or not it
prejudices other creditors, because "[t]he basic object of fraudulent conveyance
law is to see that the debtor uses his limited assets to satisfy some of his
creditors; it normally does not try to choose among them." Boston Trading, 835
F.2d at 1509; see also Atlanta Shipping Corp. v. Chemical Bank, 818 F.2d 240,
249 (2d Cir.1987); Ronga v. Chiusano, 97 A.D.2d 753, 468 N.Y.S.2d 174, 175
(1983); 1 Garrard Glenn, Fraudulent Conveyances and Preferences Sec. 289, at
488-90 (1940).
28

New York courts have carved out one exception to the rule that preferential
payments of pre-existing obligations are not fraudulent conveyances:
preferences to a debtor corporation's shareholders, officers, or directors are
deemed not to be transfers for fair consideration. See Farm Stores, Inc. v.
School Feeding Corp., 102 A.D.2d 249, 477 N.Y.S.2d 374, 378 (1984), aff'd,
64 N.Y.2d 1065, 489 N.Y.S.2d 877, 479 N.E.2d 222 (1985); Southern
Industries, Inc. v. Jeremias, 66 A.D.2d 178, 411 N.Y.S.2d 945, 949 (1978).
This exception is indirectly relevant to Clemence's mortgages, because
Enterprises used the proceeds from one of them to pay off antecedent debts to
its principal shareholder, Hiram J. Frank; under Farm Stores, these preferential
payments to a controlling shareholder would be fraudulent conveyances. But
the Farm Stores preference exception cannot be applied directly to Clemence's
mortgages, regardless of whether she was a corporate insider, because each of
her mortgages secured a contemporaneous advance of funds, not a pre-existing
debt. Unlike the preferential payment of pre-existing debts, the transfer of a
debtor's property to secure a present advance of commensurate value does not
ordinarily prejudice other creditors, because the debtor receives new value in
exchange for the property conveyed.

29

In sum, Clemence Frank's mortgages may not be directly invalidated either

under the doctrine of equitable subordination or as preferences to a corporate
insider. If analyzed without regard to the ultimate fate of the funds she
advanced, these mortgages could not be found to be fraudulently conveyed.
They might be fraudulent, however, if analyzed as part of a larger transaction.
This view underlies the District Court's second basis for voiding the mortgages,
to which we now turn.

30

b. "Collapsing" the transactions. It is well established that multilateral

transactions may under appropriate circumstances be "collapsed" and treated as
phases of a single transaction for analysis under the UFCA. See, e.g., Orr v.

Kinderhill Corp., 991 F.2d 31, 35-36 (2d Cir.1993). This approach finds its
most frequent application to lenders who have financed leveraged buyouts of
companies that subsequently become insolvent. See United States v.
Gleneagles Investment Co., 565 F.Supp. 556 (M.D.Pa.1983) (Pennsylvania
UFCA), aff'd sub nom. United States v. Tabor Court Realty Corp., 803 F.2d
1288 (3d Cir.1986), cert. denied, 483 U.S. 1005, 107 S.Ct. 3229, 97 L.Ed.2d
735 (1987); Crowthers McCall Pattern, Inc. v. Lewis, 129 B.R. 992, 998
(S.D.N.Y.1991) (New York UFCA); Wieboldt Stores, Inc. v. Schottenstein, 94
B.R. 488, 500-04 (N.D.Ill.1988) (Illinois UFCA); In re Best Products Co., 168
B.R. 35, 56-57 (Bankr.S.D.N.Y.1994) (New York UFCA). The paradigmatic
scheme is similar to that alleged here: one transferee gives fair value to the
debtor in exchange for the debtor's property, and the debtor then gratuitously
transfers the proceeds of the first exchange to a second transferee. The first
transferee thereby receives the debtor's property, and the second transferee
receives the consideration, while the debtor retains nothing.
31

Under these circumstances, the initial transfer of the debtor's property to the
first transferee is constructively fraudulent if two conditions are satisfied. First,
in accordance with the foregoing paradigm, the consideration received from the
first transferee must be reconveyed by the debtor for less than fair
consideration or with an actual intent to defraud creditors. If, instead, the debtor
retains the proceeds from the first exchange, reconveys them for fair
consideration, or uses them for some other legitimate purpose, including the
preferential repayment of pre-existing debts, and if the debtor does not make
the subsequent transfer with actual fraudulent intent, then the entire transaction,
even if "collapsed," cannot be a fraudulent conveyance, because it does not
adversely affect the debtor's ability to meet its overall obligations. See Atlanta
Shipping, 818 F.2d at 249; see also 1 Glenn, supra, Sec. 275, at 471 ("[W]here
a transfer for value ... is put forward as a fraudulent conveyance, the test is
whether, as a result of the transaction, the debtor's estate was unfairly
diminished.").

32

Second, and contrary to the approach taken by the District Court, the transferee
in the leg of the transaction sought to be voided must have actual or
constructive knowledge of the entire scheme that renders her exchange with the
debtor fraudulent. See Kupetz v. Wolf, 845 F.2d 842, 847-49 (9th Cir.1988);
Atlanta Shipping Corp., 818 F.2d at 249; Tabor Court, 803 F.2d at 1296;
Crowthers McCall, 129 B.R. at 998; Wieboldt Stores, 94 B.R. at 502-03. The
case law has been aptly summarized in the following terms:

33 deciding whether to collapse the transaction and impose liability on particular

In
defendants, the courts have looked frequently to the knowledge of the defendants of

the structure of the entire transaction and to whether its components were part of a
single scheme.
34

In re Best Products, 168 B.R. at 56-57 (quoting In re Best Products Co., 157
B.R. 222, 229 (Bankr.S.D.N.Y. (1993)). The existence of a knowledge
requirement reflects the UFCA's policy of protecting innocent creditors or
purchasers for value who have received the debtor's property without
awareness of any fraudulent scheme. Thus, an appropriate creditor may void or
disregard a fraudulent conveyance to any person "except a purchaser for fair
consideration without knowledge of the fraud at the time of the purchase." DCL
Sec. 278(1); see also FDIC v. Malin, 802 F.2d 12, 19 (2d Cir.1986); Farm
Stores, 477 N.Y.S.2d at 379.

35

However, the transferee need not have actual knowledge of the scheme that
renders the conveyance fraudulent. Constructive knowledge of fraudulent
schemes will be attributed to transferees who were aware of circumstances that
should have led them to inquire further into the circumstances of the
transaction, but who failed to make such inquiry. See, e.g., Tabor Court, 803
F.2d at 1295 (lenders "knew, or should have known" that monies would not be
retained by debtor). There is some ambiguity as to the precise test for
constructive knowledge in this context. While some cases have stated that
purchasers who do not make appropriate inquiries are charged with "the
knowledge that ordinary diligence would have elicited," United States v.
Orozco-Prada, 636 F.Supp. 1537, 1543 (S.D.N.Y.1986), aff'd, 847 F.2d 836 (2d
Cir.1988); see also Morse v. Howard Park Corp., 50 Misc.2d 834, 272
N.Y.S.2d 16, 22 (Sup.Ct.1966), others appear to have required a more active
avoidance of the truth, see Schmitt v. Morgan, 98 A.D.2d 934, 471 N.Y.S.2d
365, 367 (1983) (test is whether subsequent purchaser who did not make
serious inquiry "was shielding himself from knowledge that a fraudulent
conveyance had occurred"); 1 Glenn, supra, Sec. 304, at 532 (transferee may be
charged with knowledge only when there is "conscious turning way from the
subject").9

36

c. Lack of good faith. The District Court bolstered its view that the mortgage
transactions could be collapsed by deeming Clemence not to have acted in good
faith. Petitioners attempt to assert lack of good faith as a ground for voiding the
mortgages independent of the role that mental state plays in the analysis
whereby the transactions are collapsed. This use of bad faith as an independent
ground cannot be sustained. Though some New York cases have broadly
construed the reference to "good faith" in DCL Sec. 272's definition of "fair
consideration," see, e.g., Southern Industries, 411 N.Y.S.2d at 949 (voiding
preferences to corporate insiders), other authorities have cautioned against an

expansive reading of the UFCA's reference to good faith, see, e.g., Boston
Trading Group, 835 F.2d at 1512-13. We believe that where, as here, a
transferee has given equivalent value in exchange for the debtor's property, the
statutory requirement of "good faith" is satisfied if the transferee acted without
either actual or constructive knowledge of any fraudulent scheme. See Atlanta
Shipping, 818 F.2d at 249; 1 Glenn, supra, Sec. 295, at 512 (UFCA
requirement of "good faith" refers solely to "whether the grantee knew, or
should have known, that he was not trading normally, but that ... the purpose of
the trade, so far as the debtor was concerned, was the defrauding of his
creditors").
37

d. Application of legal principles. In the application of this framework to

Clemence Frank's mortgages, the initial question is whether Enterprises
received fair consideration from the entire multilateral transaction surrounding
each mortgage. With regard to the first mortgage, the $250,000 that Clemence
advanced to Enterprises was immediately passed on to the company's majority
shareholder, Hiram J. Frank, as a preference to a corporate insider. Because this
preferential payment in the second stage of the transaction was a fraudulent
conveyance under the holding of Farm Stores, supra, the net result was that
Clemence received a mortgage from Enterprises while Hiram J. Frank received
money from Clemence. Thus, at the end of the day Enterprises itself received
nothing in exchange for the first mortgage.10

38

With regard to the second mortgage, approximately $60,000 of the money that
Clemence advanced went to the Attorneys to pay for legal services, while the
remaining $40,000 was used for other corporate purposes. If both of these
payments were legitimate corporate expenditures, then the second mortgage
and the subsequent payments would not be fraudulent transfers even when
viewed as a single scheme. Although the District Court found that the payments
to the Attorneys were legitimate corporate expenditures, it voided the second
mortgage in its entirety. This was error in two respects. First, since Petitioners
have not even alleged facts that would render improper the portion of the
proceeds not paid to the Attorneys, the transaction is not fraudulent, at least as
it pertains to this much of the second mortgage. Second, we must remand the
District Court's order as it pertains to the portion of the mortgage proceeds used
to pay the Attorneys, because, as we conclude below, there is a genuine factual
dispute as to whether these payments to the Attorneys were fraudulent transfers.

39

The second stage of the inquiry as to whether the transactions may be collapsed
concerns Clemence's knowledge. Clemence was a director of Enterprises at
least until the middle of 1990, if not longer. While she was a director, the
corporation was frequently used by Hiram J. Frank as a conduit for various

payments for family and other noncorporate purposes, and Clemence's

fiduciary role charged her with constructive knowledge of these basic aspects of
the company's financial affairs, see Hanson Trust PLC v. ML SCM Acquisition
Inc., 781 F.2d 264, 274-75 (2d Cir.1986). In addition, Clemence concedes that
she knew that Enterprises was a defendant in a RICO fraud action. She also
concedes that she knew that her son, Hiram J. Frank, had made "large loans" to
Enterprises, which put her on notice that he might cause the company to make
preferential payments to himself with the proceeds from the mortgages. This
information should have been sufficient to alert Clemence to the danger that
Enterprises might improperly funnel to third parties the money she was
advancing, and she should have made reasonably diligent inquiries into the use
of the mortgage proceeds. Under the circumstances, her failure to inquire
represented a conscious turning away from the subject. Thus, with regard to
both mortgages, the undisputed facts are sufficient to charge Clemence with
constructive knowledge of schemes in which her cash advances were expended
by Enterprises for improper purposes.
2. Payments to the Attorneys
40

Petitioners also contend that Enterprises fraudulently conveyed $775,722 in

legal fees to the Attorneys, approximately $60,000 of which derived from the
proceeds of Clemence's second mortgage. The contested fees represented
payment for legal services that the Attorneys rendered as counsel for
Enterprises' co-defendants in the RICO action. Petitioners argue that the
Attorneys' legal services were not "fair consideration" within the meaning of
DCL Sec. 272 because they were not provided directly to Enterprises itself. The
Attorneys respond that their services were "fair consideration" for Enterprises'
payments because Enterprises benefitted from the unified defense of which
these services were a part.

41

The District Court agreed with the Attorneys. It found that it was to the
advantage of each defendant in the RICO action to present a unified defense
and to have all co-defendants adequately represented, because all the
defendants were threatened with joint and several liability. The District Court
reasoned:

42

One can question the wisdom of retaining some of the attorneys, a number of
whom were prominent, expensive New York City criminal lawyers. However,
the selection of the proper counsel is always a matter of individual choice. The
plaintiffs have never disputed that bona fide legal services were rendered by the
attorneys to one or more of the defendants or that their disbursements were not
actually incurred.

43

Having presided at the very lengthy trial and considered the numerous motions,
we conclude ... that in a conspiracy case such as this, Enterprises did receive a
benefit from the funds it laid out on behalf of the other parties, albeit it paid far
too high a price for that benefit. Nor do we believe that there was anything
unethical in this approach in light of the common interest of all of the
defendants and their right to have a joint defense if it was to their benefit.

44

HBE Leasing, 837 F.Supp. at 63 (footnotes omitted). The District Court

therefore concluded that the benefit Enterprises received from the Attorneys'
services represented fair consideration for Enterprises' payments, and it
accordingly dismissed Petitioners' claim against the Attorneys.

45

In determining whether Enterprises received fair consideration, the District

Court correctly disregarded the form of this transaction and looked instead to its
substance. Under DCL Sec. 272, "fair consideration" means a fair equivalent
that the debtor receives in exchange for its property or obligation. Thus, when a
debtor transfers its property but the transferee gives the consideration to a third
party, the debtor ordinarily will not have received fair consideration in
exchange for its property. However, under the well established doctrine of
Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 (2d Cir.1981), the
fact that the consideration initially goes to third parties may be disregarded to
the extent that the debtor indirectly receives a benefit from the entire
transaction. See id. at 991-92; see also In re Fairchild Aircraft Corp., 6 F.3d
1119, 1127 (5th Cir.1993); In re Jeffrey Bigelow Design Group, Inc., 956 F.2d
479, 485 (4th Cir.1992); Mellon Bank, N.A. v. Metro Communications, Inc.,
945 F.2d 635, 646-47 (3d Cir.1991), cert. denied, 503 U.S. 937, 112 S.Ct. 1476,
117 L.Ed.2d 620 (1992); In re W.T. Grant Co., 699 F.2d 599, 609 (2d Cir.),
cert. denied, 464 U.S. 822, 104 S.Ct. 89, 78 L.Ed.2d 97 (1983). While Rubin
has most often been applied in cases decided under the fraudulent conveyance
provisions of federal bankruptcy law, its approach to indirect benefits is equally
applicable under the parallel provisions of the UFCA. See Telefast, Inc. v. VUTV, Inc., 591 F.Supp. 1368, 1379-81 (D.N.J.1984) (New Jersey UFCA); In re
Chomakos, 170 B.R. 585, 590 (Bankr.E.D.Mich.1993) (Michigan UFCA).

46

Petitioners contend that the District Court's finding that Enterprises indirectly
received "a benefit" from the Attorneys' services does not satisfy Rubin 's test
for fair consideration. Under the UFCA and the parallel provisions of federal
bankruptcy law, "fair consideration" is defined quantitatively as "a fair
equivalent" or an "amount not disproportionately small as compared with the
value of the property, or obligation obtained [from the debtor]." DCL Sec. 272;
see also 11 U.S.C. Sec. 548(a)(2)(A) (1988). Thus, to determine whether a
debtor indirectly received fair consideration under the Rubin doctrine, the fact-

finder must first attempt to measure the economic benefit that the debtor
indirectly received from the entire transaction, and then compare that benefit to
the value of the property the debtor transferred. Rubin, 661 F.2d at 993. The
mere fact that the debtor received a benefit is therefore insufficient to find fair
consideration. Id.
47

Despite the considerable force of Petitioners' argument, we believe that the

quantitative analysis normally required by Rubin is inappropriate in this case
where multiple co-defendants were threatened with joint and several liability,
they mounted a common defense, and one defendant paid the legal fees of the
others. As the District Court correctly noted, individual defendants may choose
to pay as much to their attorneys for their defense as they consider worthwhile,
as long as the payments fall within a fair range of reasonable compensation for
bona fide legal services or are reimbursement for legitimate expenses incurred
during the defense.11 The same should be true of the defendants in this case
who were threatened with joint and several liability and conducted a common
defense to protect their common interests. The existence of some adverse
interests among the co-defendants might reasonably have required each
defendant to have individual counsel, but to the extent that the several defense
attorneys conducted a joint defense, they effectively advanced the interests of
all defendants simultaneously. See United States v. Schwimmer, 892 F.2d 237,
243-44 (2d Cir.1989) (recognizing joint defense privilege), cert. denied, 502
U.S. 810, 112 S.Ct. 55, 116 L.Ed.2d 31 (1991). Thus, the services that each
defense attorney performed in the course of conducting a joint defense provided
a benefit to each defendant. Rubin 's quantitative approach, requiring some
measurement of the value of the benefit to each defendant, is not applicable
under these circumstances because the full value of the joint defense inured to
the benefit of all defendants, and there is no point in trying to quantify the
incremental value added by the joint defense beyond the value of individual
representation. These joint services represented "fair consideration" for the
payment of reasonable compensation, regardless of which defendant paid the
bill. We need not decide whether some inquiry concerning apportionment
would be warranted in a case where the defenses of all the defendants did not
overlap to the extent that occurred in this case.

48

Because Petitioners do not dispute that Enterprises' payment of the Attorneys'

fees represented a reasonable rate of compensation for bona fide legal services
rendered to defendants with substantially overlapping defenses, the District
Court correctly concluded that Enterprises received fair consideration in
exchange for its payments. However, the District Court failed to consider an
alternative theory of liability offered by Petitioners: that Enterprises paid the
Attorneys' fees with actual intent to defraud its creditors. Under DCL Sec. 276,

a transfer made with actual intent to hinder, delay, or defraud present or future
creditors is fraudulent as to such creditors, regardless of whether the debtor
receives fair consideration for its property. See United States v. McCombs, 30
F.3d 310, 327-28 (2d Cir.1994); ACLI Government Securities, Inc. v. Rhoades,
653 F.Supp. 1388, 1395 n. 32 (S.D.N.Y.1987), aff'd, 842 F.2d 1287 (2d
Cir.1988). Actual fraudulent intent must be proven by clear and convincing
evidence, but it may be inferred from the circumstances surrounding the
transaction, including the relationship among the parties and the secrecy, haste,
or unusualness of the transaction. See McCombs, 30 F.3d at 328. However, a
transfer motivated by actual fraudulent intent may not be voided if a transferee
who paid fair consideration did not have actual or constructive knowledge of
such intent. Dunham v. Tabb, 27 Wash.App. 862, 621 P.2d 179, 182 (1980);
DCL Sec. 278.
49

The record establishes the existence of genuine factual disputes pertaining both
to Enterprises' intent in paying the Attorneys' fees and the Attorneys'
knowledge of that intent. Enterprises paid the legal fees of its co-defendants at
the direction of its controlling shareholder, Hiram J. Frank, who was thereby
relieved of the burden of paying for his own defense. Even though Enterprises
received fair consideration in exchange for its payments, this arrangement
effectively transferred substantial assets from the corporation to Hiram J. Frank
and the other co-defendants. Because a fact-finder might reasonably conclude
that the purpose behind this arrangement was to hinder, delay, or defraud
Enterprises' future judgment creditors, the District Court should not have
dismissed Petitioners' claims against the Attorneys at this stage in the
proceedings. We therefore reverse and remand for further proceedings on this
issue.12

50

The result of this inquiry will also determine Clemence Frank's liability on her
second mortgage. As discussed above, this mortgage represented a voidable
fraudulent transfer of Enterprises' property only to the extent that the
subsequent transfer of $60,000 of the mortgage proceeds to the Attorneys was
itself a fraudulent conveyance.13 At most, however, these interlocking
transactions resulted in a single fraudulent transfer of Enterprises' property. If
the Petitioners establish on remand that the transfer to the Attorneys was
fraudulent, they may recover this property from Clemence or (if it is shown that
the Attorneys had actual or constructive knowledge of the fraudulent scheme)
from the Attorneys. See United States v. Red Stripe, Inc., 792 F.Supp. 1338,
1344 (E.D.N.Y.1992); DCL Sec. 278(1)(a). But an unjustified double recovery
would result if Petitioners could void both the relevant portion of Clemence's
second mortgage and the transfer of the proceeds to the Attorneys. Cf. In re
Checkmate Stereo & Electronics, Ltd., 9 B.R. 585, 622 (Bankr.E.D.N.Y.1981)

(allowing only single recovery by imposing joint and several liability on

multiple transferees under New York UFCA and Bankruptcy Code), aff'd, 21
B.R. 402 (E.D.N.Y.1982); Robert J. White, Leveraged Buyouts & Fraudulent
Conveyance Law Under the Bankruptcy Code, 1991 Ann.Surv.Am.L. 357,
410-11 (1992) (bankruptcy trustee may recover only once from multiple
transferees in multilateral fraudulent conveyance). Thus, if Petitioners elect to
void the relevant portion of the mortgage, any judgment against the Attorneys
must be reduced by an equivalent amount. This election of remedies does not
affect Petitioners' rights vis-a-vis Clemence's other mortgage or the other
payments to the Attorneys.
Conclusion
51

We affirm the order of the District Court as it pertains to Clemence Frank's

mortgage securing her $250,000 note. We reverse the order as it pertains to
Clemence Frank's other mortgage, securing her $100,000 note, and insofar as it
dismisses Petitioners' claims against the Attorneys, and remand for further
proceedings consistent with this opinion. No costs.

Petitioners also instituted a separate diversity proceeding in the District Court to

void other alleged fraudulent conveyances by the judgment debtors, including
other transfers to Clemence and some of the Attorneys. See HBE Leasing Corp.
v. Frank, 851 F.Supp. 571 (S.D.N.Y.1994)

A Rule 69(a) proceeding in aid of judgment is treated as a separate action for

purposes of determining whether the District Court's decision is "final." See
King v. Ionization International, Inc., 825 F.2d 1180, 1184 (7th Cir.1987); 7
James W. Moore et al., Federal Practice p 69.05 (2d ed.); see also Fox v.
Capital Co., 299 U.S. 105, 57 S.Ct. 57, 81 L.Ed. 67 (1936)

In the absence of such determination and direction, any order or other form of
decision, however designated, which adjudicates fewer than all the claims or
the rights and liabilities of fewer than all the parties shall not terminate the
action as to any of the claims or parties
Fed.R.Civ.P. 54(b) (emphasis added).

Clemence and Petitioners contend that even without a Rule 54(b) certification,
the order voiding Clemence's mortgages is final under the doctrine of Forgay v.
Conrad, 47 U.S. (6 How.) 201, 204, 12 L.Ed. 404 (1848). Under the Forgay
doctrine, "an order is treated as final if it directs the immediate delivery of
property and subjects the losing party to irreparable harm if appellate review is

delayed." In re Martin-Trigona (Schlehan v. Olympic Worldwide

Communications, Inc.), 763 F.2d 135, 138 (2d Cir.1985). Our cases cast
considerable doubt on whether Forgay is still applicable in a multi-claim or
multi-party action in the absence of a Rule 54(b) certification. See In re
Chateaugay Corp., 922 F.2d 86, 91 (2d Cir.1990), cert. denied, 502 U.S. 1093,
112 S.Ct. 1167, 117 L.Ed.2d 413 (1992); Martin-Trigona, 763 F.2d at 139;
Zwack v. Kraus Brothers & Co., 237 F.2d 255, 262 (2d Cir.1956). But see 15A
Charles A. Wright et al., Federal Practice and Procedure Sec. 3910, at 327
(1992) (arguing that immediate appeal should be available under Forgay
doctrine where Rule 54(b) has been deliberately ignored); cf. 6 Moore, supra, p
54.32, at 54-186 (stating that inapplicability of Forgay hardship rule in multiclaim case is "anomalous"). In this case it is unnecessary to consider the
continued vitality of the Forgay doctrine in the multi-claim context, because an
interlocutory appeal is available to Clemence pursuant to 28 U.S.C. Sec.
1292(a)(1), on the ground that the District Court's order grants an injunction.
Cf. 9 Moore, supra, p 110.11, at 100-11 (suggesting that orders appealable
under Forgay are more properly treated as injunctions)
5

Our cases have not made clear whether a showing of serious consequences is
always required for an interlocutory appeal pursuant to section 1292(a)(1). See
Volvo North America Corp. v. Men's International Professional Tennis
Council, 839 F.2d 69, 75 (2d Cir.), cert. denied, 487 U.S. 1219, 108 S.Ct. 2872,
101 L.Ed.2d 908 (1988). Because the threat of irreparable injury is present
here, we need not decide this issue

We note also that the order is effectively an injunction against suit in another
court, because it requires Clemence to remove mortgage liens that she had
sought to enforce through a receivership in state court. "An order that prohibits
a party from pursuing litigation in another court is unquestionably an injunction
for purposes of interlocutory appeal...." 16 Wright, supra, Sec. 3923, at 48;
accord FDIC v. Geldermann, Inc., 975 F.2d 695, 967 (10th Cir.1992); Phillips
v. Chas. Schreiner Bank, 894 F.2d 127, 130 (5th Cir.1990); Klein v. Adams &
Peck, 436 F.2d 337, 339 (2d Cir.1971). But see Hershey Foods Corp. v.
Hershey Creamery Co., 945 F.2d 1272, 1278-79 (3d Cir.1991) (order staying
proceedings in another court is not injunction within meaning of section
1292(a)(1) if it does not relate to ultimate relief sought)

C.P.L.R. Sec. 5225(b) authorizes a special proceeding by judgment creditors

against third parties to recover money or personal property in which a judgment
debtor has an interest; it does not explicitly relate to interests in real property.
Nevertheless, all of the parties appear to have assumed that section 5225(b)
provides the procedural basis for this proceeding. In any event, since diversity
jurisdiction exists, the District Court had jurisdiction to entertain what would

otherwise have been a plenary action based on New York substantive law, and
no aspect of our disposition turns on the technical availability of section
5225(b)
8

In order to promote a uniform national interpretation of the UFCA, both this

Circuit and the courts of New York have encouraged recourse to the case law of
other jurisdictions. See Atlanta Shipping Corp. v. Chemical Bank, 818 F.2d
240, 249 (2d Cir.1987); Southern Industries, Inc. v. Jeremias, 66 A.D.2d 178,
411 N.Y.S.2d 945, 949 (1978)

We note that the burden of proving knowledge is on the party seeking to void
the transaction. See Gelbard v. Esses, 96 A.D.2d 573, 465 N.Y.S.2d 264, 268
(1983). In fact, even the burden of production shifts to the transferee only if the
creditor asserts that the transferee paid inadequate consideration and evidence
concerning such consideration is within control of the transferee. Id.; ACLI
Government Securities Inc. v. Rhoades, 653 F.Supp. 1388, 1391
(S.D.N.Y.1987), aff'd, 842 F.2d 1287 (2d Cir.1988). Because there is no
dispute about the nature of the consideration provided by Clemence, she has
satisfied any burden of production she may have had. See United States v.
McCombs, 30 F.3d 310, 323-26 (2d Cir.1994)

10

Clemence nonetheless argues that Petitioners were not prejudiced by this

collapsed transaction, because Hiram J. Frank used the funds he received to
remove a lien from another piece of property that can now be levied upon by
Petitioners. In other words, the $250,000 is still available to Petitioners, even
though it is in Hiram J. Frank's rather than Enterprises' possession. Though a
transfer may not be challenged as fraudulent unless it prejudices the
complaining creditor, see, e.g., Citizens & Southern National Bank v. Auer, 640
F.2d 837, 838 (6th Cir.1981) (Tennessee UFCA), prejudice is not eliminated in
this case by the fact that Hiram J. Frank, to whom the mortgage proceeds were
transferred, is jointly liable with Enterprises to the Petitioners
A creditor is prejudiced, sufficiently to void a fraudulent transfer, when an asset
in the hands of its debtor is converted into funds that find their way to another
debtor of the creditor. The availability of an alternative collection opportunity
does not eliminate prejudice in this context. Of course, the opportunity to void
Clemence's mortgage and to collect from Hiram J. Frank would not permit any
recovery in excess of Petitioners' judgment; no such excess recovery is alleged,
and the judgment remains unsatisfied.

11

This conclusion follows directly from the definition of "fair consideration" in

DCL Sec. 272: the legal services rendered by defense counsel represent a "fair
equivalent" that the defendant receives in exchange for the legal fees he or she

pays
12

Other material factual disputes raised by the parties may be considered on

remand. However, after reviewing the record de novo, we conclude that there is
no basis for the Attorneys' argument that Petitioners' claims are barred by the
doctrines of waiver, laches, or equitable estoppel; the Petitioners are therefore
entitled to summary judgment on these defenses

13

We ruled above that, under the facts of this case, Clemence's relationship to the
affairs of Enterprises created a duty of inquiry as to its uses of her funds, and
that her lack of inquiry charges her with constructive knowledge of how those
funds were in fact expended. Therefore, whether the $60,000 portion of her
second mortgage can be voided depends, on remand, only on establishment of
the actual fraudulent intent of Enterprises with respect to the payments to the
Attorneys